Forecast for Canada’s housing market in 2019

The next year in real estate is all about a return to the norm. At least that’s the housing market forecast for 2019. Mortgage and interest rates are climbing — and returning to more historic levels; sales activity is slowing and homes of all types are sitting on the market longer and, in some markets, prices are starting to come down.

This “not-yet-a-nationwide correction” correction — for we haven’t hit a correction by economic standards — was both predictable and necessary. Economically speaking, a correction occurs anytime there is a 10% or more decline in sales activity or prices. In the Greater Toronto Area, the largest price drop was recorded in August 2018, when prices dropped 4.6%, the largest decline since 2000. In the Greater Vancouver Area activity resale activity dropped 17.3% in August 2018 and was down 43.5% year-over-year, but prices drops didn’t climb to the 10% range.

What does all this mean for Canada’s housing market going into 2019? For those currently or thinking of getting into the market, such as buyers, sellers or investors, what can we expect in the next 12 months or so? Here are three trends to watch for in the real estate markets in 2019 and a brief outlook on what to expect in the housing markets of each region across Canada.

#1. Supply will remain limited

One of the best indicators for housing market supply is the number of housing starts anticipated in the upcoming year. Housing starts measure how many new build properties are being started during the calendar year — some of which will hit the market in the same year and some will come to market in the following years. However, for forecasting, housing starts are considered a forward indicator — a way to predict sales activity. Builders will often ramp up permit applications and housing starts if their analysts predict heavier demand; conversely, builders will reduce output when less demand is expected.

In the last 10 years, housing starts peaked in 2017 and started to decline in 2018. We can expect more of this gradual decline in 2019 and 2010, explains Bob Dugan, Chief Economist of the Canadian Mortgage and Housing Corporation in the Fall 2018 Housing Market Outlook report.

This gradual decline in new build housing supply is “more in line with a moderating economic outlook and [with] demographic conditions,” writes Dugan. While income, employment and household formation will continue — and thereby continue to demand housing in Canada — growth in these areas is expected to slow over the next few years. “As a result, housing starts will be brought closer to levels broadly in line with long-run averages by the end of 2020,” says Dugan.

#2. Demand will be reduced, but sustained

Hindsight is 20/20 and in hindsight, we now know that 2016 was the peak of the current housing market cycle in Canada. Since then, there’s been an overall gradual decline of housing starts and sales activity (although, there were some hot months and markets during the last two years). Going into 2019, we can expect to see more of this moderated activity in the nation’s housing market.

Part of the reason for this slowdown is tepid employment growth predicted for the next 12 to 24 months, as well as the rise of mortgage rates during that same time frame. These factors won’t halt housing market activity, but it will certainly restrain sales activity and price growth, which is predicted to return to more historic norms of roughly 2% per year.

One surprising trend that will begin in 2019 is that demand, and housing starts, for multi-family residential new builds will decline. Smaller growth in the population aged 25 to 34 (the cohort most likely to start families) and a large pool of first-time buyers (some of whom were shut out of the market over the last few years) will also temper demand for multi-family housing units, like condos and townhouses. Analysts at CMHC believe that a portion of the reduced demand will be picked up by downsizers, looking for smaller, less costly, more manageable homes, but there will still be an overall decline in multi-family demand and new build supply

#3. Affordability is still an issue, but Canadians may start to feel a bit of relief

“The national housing market still has a long way to go before it regains the level of affordability it had before 2015 when prices in Toronto and Vancouver took off, but has now taken the first steps to do so,” writes Moody’s Analytics Director Andres Carbacho-Burgos in the company’s annual report. Carbacho-Burgos attributes this cool down to the efforts made by the Bank of Canada, the federal government, various provincial governments as well as the Office of the Superintendent of Financial Institutions (the institution responsible for holding all financial institutions in check). The various policies and taxes achieved their aim: to cool down demand in the country’s hottest housing markets. The fear now is that the “measures taken to stabilize housing affordability and mortgage credit quality may prove too strong and may precipitate not just a house price correction, but also an extended decline in sales and possibly a reduction in homeownership.”

The good news is that activity in the second half of 2018 indicated that both sales activity and price growth rallied. Going into 2019, analysts predict a bit of a surge, before a final slowdown in housing market activity that will last for at least a year or two.

For buyers struggling with the lack of affordability, this means that by 2020 price growth will have moderated to the point that there may be more options, particularly if demand for multi-family units drops, signalling price declines in these property types.

Provincial Outlook

Barring any extraordinary domestic or international economic or global events, here is the provincial outlook for Canada’s housing market for 2019.

British Columbia

B.C. has had the dubious luxury of strong economic growth and a growing population in the last decade. The result was a housing market with a tremendous growth in demand. This was part of the reason for the astronomical price increases over the last half-decade. Going into 2019, however, the provinces economy and population growth is expected to moderate. This will have a dramatic impact on sales activity, given that so many buyers already feel priced out of the Lower Mainland and in other urban areas of B.C. All of this will translate into slow sales activity in the B.C. housing market and this will, eventually, trigger more price corrections.

Prairies

Both Alberta and Saskatchewan were heavily hit by resource sector price corrections over the last few years. This economic slowdown meant fewer jobs, less disposable income and a housing market that favoured buyers. Things appear to have stabilized in both provinces, meaning the housing markets will also gradually become more balanced.

Manitoba has been the steady horse in this race with market conditions and fundamentals slowly plodding along as slow but stable rates. This should continue going into 2019 and beyond.

Ontario

The new mortgage stress test, rising interest rates and housing prices that were way above fundamentals really dampened sales activity across Ontario in 2018. All things considered, this state of affairs should continue, but it won’t. The province as a better than expected job growth forecast and immigration will fill in the population growth needs to help sustain the provinces housing market. Between the fear of missing out again and the threat of increasing mortgage rates — which really does erode a buyer’s house buying budget — we expect buyers and investors will rush into the market again in 2019. Perhaps not with the same urgency as in 2016, but enough that it will postpone the inevitable: a slowdown in this province’s housing market activity in 2020 and beyond.

Quebec

After B.C. raised its Non-Residence tax (aka: foreign buyer’s tax) and Ontario introduced a similar version in early 2018, parts of Quebec’s housing market really started to heat up. Activity in luxury homes, single-family houses and even condos in Montreal really started to heat up prompting headlines of the city becoming the next stop in the Chinese buying stop.

Going into 2019, this activity may dry up a bit, as relations with China and Canada continue to be strained and because the Chinese government continues to crack down on money leaving the country illegally. Still, the recent demand has made housing prices a bit unaffordable for most, which will help to keep demand high for multi-family units, such as townhouses and condos.

Atlantic

The Atlantic provinces can expect steady market conditions going into 2019. Some markets, such as larger urban areas in Nova Scotia, can expect continued sustained activity. This will probably mean that sales activity and average housing prices will continue to trend upwards as the year progresses.

Romana King is an award-winning personal finance writer and the current director of content for Zolo. King has contributed to business and lifestyle publications including CBC.ca, Toronto Sun, Maclean’s, MoneySense, Globe & Mail Custom Content Team, and Toronto Star. She is a passionate speaker about financial education and engages her audience on a variety of personal finance topics from kids and money, home buying and selling tips, and estate and investment planning. King won the 2015 SABEW Business Journalism award and is currently nominated for a COPA 2019 award, Best Service Article, for her annual project Best Deals in Real Estate. As editor of CI Top Broker, King guided her magazine to obtain its first KRW Business Journalism nomination, and she was part of the small team in 2011 that helped MoneySense win Magazine of the Year at the 34th annual National Magazine Awards.